Do You Have the Stones to Buy Gold?

Intrepid investors should embrace the fundamentally sound metal

In case you haven’t heard yet, gold prices have gone through something of a stumble.

On Monday, we saw gold sustain its biggest one-day drop in more than three decades, and the metal suffered a two-day drop (4/12 and 4/15) of more than 13%, so we now are officially in bear market territory.

Sure, it’s not easy to say — and more difficult to do — after the drubbing we’ve seen in gold of late, but destiny rewards the intrepid in life, and if you are willing to conquer your fear of buying a sector while it has just undergone a freefall, then getting long gold here could make you a huge winner.

The way I see it, the fundamentals that have driven gold substantially higher since the equity meltdown that started in October 2008 (gold is up about 85% since) still are very much in place.

Ask yourself this: Have the Federal Reserve and other central banks around the globe stopped their monetary easing policies? The answer, of course, is no, and despite the occasional hint from certain central bankers to the contrary, Ben Bernanke and crew remain committed to trying to inflate our way to prosperity.

Now, many market pundits see the recent selloff in gold, silver, copper, oil and other commodities as evidence that deflation, rather than inflation, is beginning to rear its dastardly head. In fact, it has been fear of inflation — the condition you’d expect with the flood of fiat currency that’s been created around the globe — that has been at the crux of rising gold prices.

Yet if the deflation trade scenario really is at the heart of the current commodities selloff, then how should we expect central banks around the globe to respond? No central bank wants to see deflation, which means a pernicious contraction in credit and a decline in the value of real wages and goods due to a major slowdown in economic activity.

To combat deflation, central banks around the globe will have to really start ramping up monetary easing, and that means a lot more “money printing” — the same scenario that, until very recently, has caused big money flows into inflation hedges such as gold.

I know this sounds somewhat strange, but the current action in most markets is anything but “normal.” The truth here is that markets aren’t really making a whole lot of sense right now, and that tends to generate a lot of fear.

And when fear is omnipresent, investors often pile back into gold.

So, if your tolerance for fear is high enough, and if you just plain have the stones, then buy gold now.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.